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JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES
03/09/2009
Financial products and services in Australia

CHAIRMAN —Welcome, Mr Jelich. Do you have any comments on the capacity in which you appear?

Mr Jelich —I am here as the former national development manager for Storm Financial and managing director of Storm Financial (Five), which was the old Jelich Jones business.

CHAIRMAN —Would you like to make some opening remarks or a statement to add to your submission?

Mr Jelich —I gave the committee an initial submission and a supplementary. I also have further information that I have not had time to table which I would like to live with the committee. It has come to light since the last submission was made. I am going to do my very best today to do whatever I can to provide you with the information that I have, to ensure that this nightmare never occurs again, and I am also going to do my very best to provide you with information that may be helpful in providing restitution for ordinary, innocent, honest Australians who did nothing wrong other than trust us. As hollow as it may sound, I do want to publicly apologise to the people who have been devastated by this event. With that said, I want to give you a little bit of background.

I started in this industry in 1982 in a little place called Redcliffe, where I started building a business. It soon became apparent that the business was growing, it was attaining some level of success, and from an early stage I felt extremely thankful and obligated to three major players. One is the industry that I am in, another is the community that I live in and the third are the clients and the people that I acted for. To this day, I feel that the people in those three categories have given me more than I have given them. So I have felt deeply obligated to repay, to the extent that I can, my industry, my community and the clients. Others can judge whether that is just words or whether there were actually actions behind that.

In 1991, Bob Jones joined me. He was a personal friend and a man of high integrity, and we started the firm Jelich Jones. We were very passionate about Redcliffe and were deeply and intimately involved in our community in a meaningful manner. Whether it was sporting associations or business bodies, we involved ourselves in the community and wanted to contribute in every way possible.

CHAIRMAN —Mr Jelich, sorry, I do not want to interrupt you. I am just conscious of the time. We really appreciate your involvement in the community—

Mr Jelich —Please, just indulge me a little longer.

CHAIRMAN —Sure.

Mr Jelich —From a business standpoint, financial planning has become quite a complex matter. But the success or otherwise that we had over a 25-year period—that is, from 1982 to 2007—was founded on five basic principles, and I will quickly run through them. You can question me on them a bit later on. I would preach these five principles to anyone who would listen throughout my life.

Firstly, before I acted for a client, I always needed to ensure that we set clear goals, because if you do not have clear goals it is highly likely that you are not going to achieve what you are after. In order to do that, I maintained that homeownership was the primary goal of every individual, particularly early in life. So in many instances I would spend meetings solely on homeownership, particularly if they were young, and on the importance of that and what it meant in a financial sense. Secondly, I always tried to preach the importance of keeping cash reserves for rainy days. I just felt that was a requirement of sound management.

Thirdly—though it was difficult to articulate to people and took some time—my belief was that an individual, in this day and age, to achieve their financial goals needed to borrow some money at some point. Fundamentally, and philosophically, I believe you do need to borrow to achieve financial goals. The issue of how much to borrow and whether to invest it in your own business, into property or into other the asset classes is a separate matter. But it was a very difficult psychological burden for people to overcome: the fact that they had to borrow.

Fourthly, we always maintained that people should stay with quality. So if they were buying property, you wanted it to be in an area you were familiar with, that you knew a lot about, and one that, over time, would grow. If they were buying shares, there was a philosophical argument about direct stocks, actively managed funds, hedged funds or—and in my view this was the safest way to invest in the equities market—indexing. Fifthly, we advised: ‘Always ensure that your superannuation is managed correctly.’

So it was those five points generally that I preached, and I would like to think that, though others can judge whether, that ensured whatever success we did achieve during that 25-year period. And of course I made absolutely no bones about the fact that the goals had to be clear, they would change through the various stages of life, and there was going to be hard work involved. Rightly or wrongly, I am very proud of some of the work we did during that period in assisting people to achieve the goals that we had set, which, in many cases, took over 20 years.

The relationships I had with people were very important to me. I always wanted to be loyal to people. I wanted commitment from them and I wanted them to trust me, and that could only happen over time. I also want to stress that I derived enormous satisfaction from the many positive results we got over a long period; it was a form of sustenance for me that I really felt good about. Indeed, it was a privilege to act for people.

In that context, the only way that I can describe the last nine months, starting in October, is to use the word ‘holocaust’. That is the only word I can think of that describes what has occurred. I feel deeply responsible on many levels—to the clients, the community and the industry—for the holocaust that has occurred. But I also deeply feel responsible for the regional offices I brought into the Storm fold all over Australia and to their staff, but mainly, of course, to the clients that did trust us.

I want to touch on the reality of how this holocaust has manifested itself. I am personally unaware of any suicides—none have been confirmed to me—but on every single day since January, I can vow to you, I have spoken to somebody who has contemplated suicide seriously, or who is contemplating it as we speak now and has displayed suicidal tendencies. There have been severe strains on marital relationships. Healthy people have had cardiac arrests. There has been loss of dignity and self worth; severe depression; and, as Noel O’Brien alluded to, a tremendous breach of trust, leading to a suspicion of people generally, including betrayal.

When I think about the people who spoke before me, it brings me down to my knees and I feel very emotional. I will never be able to thank them, because in January I was in a psychiatric ward and these three gentlemen put their own needs aside and somehow garnered forces and gathered what was left, and they have formed a point of contact and a focal point that has given people a place to vent their anger and to achieve some level of comfort. Without them I am not sure that we would be here today.

I will put this in chronological order. In March of 2007, I made the worst decision of my life in a business sense. That is, I sold my business to Storm Financial, hence being one of the larger creditors to the failed company now. It was a decision that was not taken lightly. It was a decision I did not want to make, but I did sign the contract. We were very parochial in Redcliffe. We were proud of what we had done. We controlled the revenue—certainly for our patch—and we held sway about what the clients’ tailoring of investments would entail.

Despite assurances to the contrary post sale, complete control was moved to the central office. All of the revenue went to the central office, and the input into client manufacturing of advice was taken from us and allocated to the central processing cell. That was strict company policy and, in my humble opinion, from March of 2007 the welfare of the clients was overlooked for an obsessive desire to publicly list Storm Financial. The complete, obsessive focus was on fee income, I assume to satisfy analysts’ expectations. A number of times it was said, ‘We own you. You will do what you are told,’ and I have some evidence here of some recharges that were charged back to my office.

In December of 2007, a prospectus was issued to list the company publicly. After digesting and seeing for the first time the IPO offering, I went into a fuming, uncontrollable rage, because I saw nothing other than a corporate heist by the founders. I sought advice from mentors and lifelong friends whom I trusted deeply. Those people included the Australian cricket coach, John Buchanan, for whom I have very high regard as a deep thinker and someone who would give me wise counsel; Dr Phil Jauncey, who is a personal friend, an internationally renowned psychologist and someone for whom I have a lot of respect; and also John Gibbs in Sydney. They advised me about what to do with what I thought was a corporate heist. They said, ‘Settle down. Get some legal advice’—which I have done and I have got evidence here that I sought from McCulloch Robertson about extricating myself from the company. The upshot was that I decided to stay, for two reasons. The first reason was: my whole world was now involved with Storm—from my mother, to my immediate family, to my extended family, to the people of Redcliffe, to the external advisers. If I were to leave, where I was I going to go? It was my world since 1982, since I was 21 years of age. So it was impossible to walk out on that scenario.

The other reason which had a big bearing on my staying was, ‘Boy, this is wrong, but at least we have got the backing of the Commonwealth Bank on a number of levels.’ They manufacture our funds, they provide our retail lending, they provide our margin lending, they do our insurance and they hold our corporate finance. So I had a lot of faith in the major supplier of goods to us, which I thought would keep us in good stead.

I want to reiterate how upset I was during that period. I went for at least a six-month period—probably closer to nine months—subsequent to the failed IPO, where I did not speak to the founders. I can give you details later on if you want me to about why I felt that way.

On 10 October last year my stomach turned because I knew the company was in trouble. In fact, I knew the economy was in trouble because it was a Friday and the market had fallen below 4,000 points, so you did not need to be a Rhodes scholar to know that we were in trouble. Mr Rudd guaranteed all bank deposits two days later—I believe it was on a Sunday afternoon—and I think that it showed the seriousness of what was going on in the world at the time. But I do remember sighing to myself and thinking, ‘Thank God we are with CBA.’

Another critical date that I think is important in the overall examination was a meeting that was convened on 7 November in the Storm offices in Brisbane, where all the regional advisers were hauled in very quickly. The CFOs were there and said: ‘We have a minor accounting issue. We need to extend the money we owe you by a year so that the balance sheet takes the loans off our current liabilities and put them onto long-term liabilities.’ It was conveyed to us that the reason for this was so that we could continue to assist clients with funding during the downturn to the tune of $350,000 to $400,000 a month. It was to help us secure extra funding from the Commonwealth Bank. We were told that there was $17 or $18 million in the bank at that time and, more importantly, we were told by the founders that the company had enough capital to trade for another 18 months without any further revenue. So, during a difficult period, that was music to my ears, and I went back to my stakeholders, including staff and clients, and said, ‘Hey, we are really battling here but we are going to be on our feet for another 18 months. Come what may, we have got enough capital to get us through.’ Those documents were immediately signed that afternoon by the stakeholders. It was done in good faith based on the information provided to us at the time, and it certainly formed the basis for some of the personal decisions I made subsequent to that.

On 1 December we had an email—which I had here but it did not have prior to submitting my submissions—that a joint task force had been set up between the CBA and Storm. Again, it was music to my ears that we were working together with our key ally to address the issues.

On Monday, 8 December, I knew the death knell had rung. The Commonwealth Bank, with pre-scripted calls absolving themselves of any guilt, starting calling our clients directly. I just knew that that was not part of what I was told a week earlier about there being a joint task force working towards a resolution.

On 9 December the bank, in their wisdom, reduced the ratios from the mid-90s back to a 70 per buffer and an 80 per cent margin call. That left hundreds of people stranded where they were really locked away in no-man’s-land with no chance of recovery.

On the 10th, the Commonwealth Colonial First State funds were shut down completely, irrespective of whether they had any level of lending attached to them at all. On the 11th and the 12th, the headlines in the Townsville Bulletin were ‘CBA pulls plug on Storm,’ and it was all over.

I want to accept responsibility for my part in this holocaust. But I believe that the bank needs to be condemned for its malicious, swift, pre-orchestrated and brutal decisions that ultimately led to the disaster that we find ourselves in now. They had a complete disregard for their customers. They were an institution that I was very proud to have been involved with for so long and they were an institution that had received Mr Rudd’s government guarantee, which was funded by taxpayers, only a couple of months earlier. I have some other points here. I can keep going if you like, or take some questions.

CHAIRMAN —Mr Jelich, we are really thankful. You have provided a lot of information, and we have your submission. In the next 15 minutes, we might use your experience and knowledge to get a better understanding of what took place and what went wrong. What convinced you to join Storm? What was the big sell?

Mr Jelich —The back office. They had a fantastic compliance regime. They dotted the i’s and crossed the t’s. That was very attractive to Bob and I.

CHAIRMAN —As you have described it, your business was vastly different—almost diametrically opposed—in terms of the type of belief structures that you had, systems that you used and advice that you provided to individuals.

Mr Jelich —Not at all.

CHAIRMAN —No?

Mr Jelich —No. The success of our business was based on the five parameters that I have outlined, which did include a fundamental belief that borrowing is required to achieve financial goals.

CHAIRMAN —You talked about the IPO listing, and you said that you saw it as a corporate heist. Can you elaborate? What so offensive about the IPO and the documents that you saw that changed your views?

Mr Jelich —I was not privy to any of this information until the prospectus was issued. I will go through them in no particular order. The regional offices that were bought by Storm represented eight per cent of the projected market capitalisation. The regional offices, in my opinion, would have accounted for more than 50 per cent of the revenue of the entire company. I thought that that was a gross inequity in share distribution relative to what the revenue that it would generate. That is the first thing. The second thing is that the founders chose to retain 53 per cent and total control of the company. The founders chose to put $40 million in their pockets the minute that the company listed. There were royalties, licensing fees and other payments made to a company called Ignite from the listed entity, which was 100 per cent owned by the founders. I did say in no particular order. The list price, according to the prospectus was a lowball figure of $425 million to $500 million and the founders would not budge off those numbers. Those are outrageous values for a company of our size that I had quite a bit to do with that.

Mr ROBERT —How many times EBIT was that?

Mr Jelich —Maybe 15 to 20.

CHAIRMAN —Would you say the fees and charges you read in the documents meant it was very difficult, given all those fees and charges, for you to return a profit to your investors or to yourself?

Mr Jelich —No, my objection was to the large lick of the pie that the founders chose to take off the table initially. Then they retained 53 per cent, even after the public offering, whilst the regional officers who produced a huge amount of business—I am guessing in excess of 50 per cent—were allocated eight per cent equity in the total vehicle—in addition to royalties, commissions and fees paid to a separate company owned entirely by the founders.

Mr PEARCE —I have read your submission. In addition to selling your business, you assumed a position in Storm. Could you outline to the committee what your job was?

Mr Jelich —In addition to selling the business in 2007, in 2003, when we moved the licensing to Storm, I took on a national development role. It was my job to bring on new advisory groups under the Storm model.

Mr PEARCE —How did you do that?

Mr Jelich —I had had 25 years in the industry at the time. I had a lot of colleagues, a lot of friends and a lot of people who I had contact with during that period, and I approached them about the opportunities that Storm offered.

Mr PEARCE —In your opinion, what was the major reason behind Storm’s collapse?

Mr Jelich —I will pinch a word from Justice Logan’s findings in the Storm Financial v ASIC case in, I think, March this year, and that is the word ‘chimera’ that Justice Logan used in relation to the Cassimatis testimony in that hearing. I had no idea what a chimera was, but I looked it up in a dictionary and it said it is a ‘fanciful mental illusion or fabrication; a wild and unrealistic dream or idea’. One of the predominant reasons Storm failed was that it did not have the cash reserves and cash backing it had purported, to me certainly and to many others, to have. Terms like ‘a very strong balance sheet’, ‘low levels of debt’, ‘a war chest of cash reserves’, ‘the essential need to grow cash reserves before you grow your business’ were impressed upon advisers and staff, leading us to the belief that there was a war chest available, a lot of money—as any business should have—at least to trade, as was mentioned in early November, for 18 months. Less than a month after that, I was horrified that two months of poor income, from October to November, meant there was nothing there; the company was insolvent and it could not pay its tax bill. As quoted in the press, the management of the company was reckless and irresponsible because it had a duty to a number of stakeholders to have that money put aside for rainy days, but it simply was not there. It destroyed me.

Mr PEARCE —I am interested in the discussion about who had the responsibility for the client. We have received conflicting evidence about this issue. The committee has been told that in some cases the relationship was between the client and Storm, while on other occasions we have been told that the relationship was between the client and the banks. Can you offer a view?

Mr Jelich —It was definitely between the client and Storm. Within  that there are product providers with every firm. Whether those product providers provide platforms, insurances, investments or shares, the relationship is between the adviser and the client, with products provided by certain parties.

Mr PEARCE —But are you telling the committee that in your view, and given all the experience you had with this organisation, the responsibility for managing the client, looking after the client, was with Storm?

Mr Jelich —Absolutely. Yes.

Mr PEARCE —We have received some evidence that suggests to us that Storm had a model where they actually wanted to manage all of that relationship. In fact, we have received some evidence that suggests to us that that was the way Storm operated—that they preferred to be the entity talking to the client and they preferred the banks to be behind the scenes. Do you support that evidence?

Mr Jelich —It is my understanding—and I understand it to be fact—that the relationship is with the adviser and the client. For example, if you want to use a builder, the builder and the person he is building for have the relationship. The builder then uses subcontractors to perform certain tasks. So we had a number of subcontractors, if you like, who performed certain tasks in order for us to perform our functions.

Mr PEARCE —There have been reports in the media in various forums that that sort of process extended to staff members of Storm actually completing documents on behalf of clients and submitting the documents fully completed to an entity like a bank. There have been many clients of Storm who have said that they had no relationship with the banks, that it was all done by Storm. Was that your understanding?

Mr Jelich —My understanding was that information would be collated in a regional office and—on a compulsory basis—had to be sent to the central Storm cell for processing.

Mr PEARCE —What does ‘processing’ mean?

Mr Jelich —Analysis, manufacturer advice, tendering for loans—the manufacture of whatever needed to be done for any individual had to leave the regional office and go to the central base.

Mr PEARCE —I have one more question. Given your experience in the financial services industry, you would obviously know the Corporations Act well. In your view, given your experience, were the requirements of the Corporations Act maintained within the organisation in which you worked?

Mr Jelich —Up until 10 October, I believe they were.

Senator McLUCAS —Thank you for your submission and for your testimony. That is the issue I would like to pursue with you. You may have heard my questions to Mr Cassimatis this morning about his responsibility as a licensee under the act. I asked him how he recruited people and his answer was ‘they came to us’, and that is a reasonable thing and I think that might have been your job. Am I right in saying that?

Mr Jelich —Certainly, from late 2003 it was.

Senator McLUCAS —That is reasonable. What processes were in place once you had identified other agencies—mostly MLC agencies, as I understand it—to join Storm? What processes were there to ensure compliance with the Corporations Act, in a large organisation like Storm, that ensured that the responsibilities of the licence holder were put into place with respect to the responsibility of the representative? It is a process question, Mr Jelich.

Mr Jelich —There were separate divisions and one was a compliance cell. Nothing would fall through the cracks in that cell. There were checks and balances to look after that area that I would say were tighter than those in other firms I was familiar with.

CHAIRMAN —Was that to protect clients, or was it to protect Storm?

Mr Jelich —The question was about what processes were used.

CHAIRMAN —I know, but I am asking you an additional question. Was all the compliance focused at protecting Storm or was it focused at protecting the investment of the clients?

Mr Jelich —I would say both.

Senator McLUCAS —We spoke to other people who were formerly in the compliance section and my understanding—and I may be wrong—is that the compliance section was looking more to the accurate delivery of the paperwork involved in an application for a loan et cetera. Can you assure me that in the compliance section there was a section that ensured that its representatives were adequately trained and competent to provide those financial services? It is a human resource management question, rather than a financial compliance one, in terms of the application process and everything being ticked off et cetera.

Mr Jelich —I believe there were sufficient human resources to address the issue you are asking me about. Sadly, looking back, I am not sure that there were sufficient human resources post 10 October last year at the Storm end, my end, and the banks’ end. That is a separate issue, but certainly I was of the opinion, and had been told by Emmanuel Cassimatis many times, that ASIC had told him after compliance checks that Storm was the envy of the industry and ASIC wished other firms were as compliant as Storm was. So I had no reason not to think that the checks and balances in the compliance cell were extremely well run.

Senator McLUCAS —I am not sure that we are talking to the same question.

Mr Jelich —I am sorry.

Senator McLUCAS —But I am going to have to stop there. Thank you, Mr Jelich.

Senator WILLIAMS —Would I be correct in saying you did not have a very good relationship with Mr Cassimatis when you were with Storm?

Mr Jelich —Until March 2007, it was a marriage made in heaven, with the benefit of hindsight, because I had a bit of pull. I had my own revenue from the Redcliffe office, and I was making money on the national development side. Whilst we would argue about many things, the relationship was very good and on occasion he would listen to some of my thoughts and beliefs. Post March 2007, it deteriorated dramatically because in no uncertain terms I was told: ‘We now own you. This is company policy’ and, despite what people may think, there was no authority for me at all to even write out a petty cash cheque, or to have input into the specific client plan recommendations. It was company policy to shoot it off to Townsville. Yes, it was testy. It was very good until March 2007, but post that it deteriorated and I was very close to leaving.

Senator WILLIAMS —You have obviously been in the finance industry for a long time, since 1982. I have asked everyone this question. Whose job was it to notify the borrowers, or investors if you want to call them that, about the margin call?

Mr Jelich —Mr Ripoll, I have some information here that I am going to leave with the committee. Can I quickly run through the headings?

CHAIRMAN —No. It is not that we do not want you to do so, it is just that if you do it will take too long and we have other people waiting.

Mr Jelich —In answer to your question, the information I gave ASIC took one day and a half to photocopy. It was a lot of information. But what I have done here is peel everything out other than what is related to margin lending. I respectfully ask that the committee have a look at it. I think you will find some answers in that document. Unquestionably, I received margin calls on behalf of clients from CGI in 1997, 2000, 2001 and 2003. I am not sure why there is this debate as it has always been the responsibility of the margin lender to make the call. The evidence in that dossier will support that.

Senator MASON —Mr Jelich, you said something very interesting on page 9 of your submission under the heading ‘A cosy relationship.’ You said:

Emmanuel Cassimatis and its lenders, particularly the CBA (specifically Colonial Geared Investments) enjoyed a seamless, very close relationship. The intimate relationship was very rewarding for both parties and in my belief led to a relaxation of prudential standards and “creative” handling of clients’ paperwork in relation to asset valuations and loan applications.

You then gave examples: favourable contract terms—in other words, higher LVRs and buffers; Andrew Symonds, the test cricketer; a gala ball in Italy; loans to Storm employees; and ex-CBA employees working for Storm in Townsville. Then you mentioned a VAS computer valuation system. That linked Storm and CBA. Was any other bank given that sort of access?

Mr Jelich —I have since learnt from the CBA in Townsville that VAS was not exclusively used for Storm; it is a national valuation tool used by everyone in the Commonwealth Bank. Whether other banks use it or not, I am not aware.

Senator MASON —We have to move on, but, in essence, they are all examples or indicia of a cosy relationship that could have led to a relaxation of prudential standards, yes?

Mr Jelich —Yes. I would like to say that I was very proud of that relationship for a long time. My relationship with Paul Johnston, who was the CGI national head, dates back to 1996.

Senator MASON —It had benefits for people, including the LVRs being higher and so forth. But, in the end, it was a two-edged sword.

Mr Jelich —I have not only been privileged to expand the Storm brand nationally; I also had visions of taking it to India and to New York City. I had flown executives from New York to here to look at it. I went to India last year looking for opportunities to expand the business model and the brand. But one of my key selling points was the strength of the relationship with Australia’s biggest bank. They manufactured our products, they did the insurance, they did the margin lending and they did the retail lending. It was something that I had a lot of pride in.

Senator WILLIAMS —Was there a situation where either Storm or the Commonwealth Bank raised or realised the increase in the value of assets for clients and then one contacted the other to encourage more lending and more gearing? Do you know anything about that? I was told that the CBA raised the value of houses, for example, and then notified Storm, saying, ‘These clients now have more equity if you wish to approach them to borrow more money.’ Do you know of anything like that happening?

Mr Jelich —Yes, I do. It coincided with the shift post March 2007 where there was this insatiable thirst for fees.

Senator WILLIAMS —Who raised those values? Was it led by Storm or was it led by the CBA?

Mr Jelich —I am unsure, but it was a mutual arrangement to regularly revalue properties in certain areas with the objective of extracting loans against higher values.

Mr PEARCE —How was the revaluation done?

Mr Jelich —It was explained yesterday by the CBA employees in Townsville. There was a computer system that they punched some criteria into, including postcodes, and they would use whatever came up on the computer as the valuation that was acceptable.

Senator WILLIAMS —And then they would contact Storm to say there was more equity with these customers?

Mr Jelich —Yes, that is correct. If it is appropriate, I also want to apologise to the CBA employees in Townsville that were sacked recently because it had been purported in the CBA submission that they were in breach of company policy and that they were dismissed for that reason. I have learned this week that in fact all of the Storm files held by the CBA in Townsville were audited by the very top of the CBA in February, and congratulations were passed down to the CBA people because they passed muster with flying colours. This simply leads to the point that the policy was wrong and the staff were acting according to the guidelines they were issued by senior credit people, which is alarming. They have since changed those policies in recognition of the fact that the policies were wrong.

CHAIRMAN —Mr Jelich, thank you very much for your evidence and your submission. You have just handed over your private and confidential dossier. The committee will look at it, make a decision and return it to you.

Mr Jelich —I want to thank you all very much for allowing me to appear. You have heard about a lot of tragedies. I plead with you to do whatever you can to ask Mr Norris, Mr Clothier, Mr Phelps and Mr Kamal Aranout—who I have a high degree of respect for—from CGI for their version of events for that nightmarish period from October to December last year. Thank you very much.

[3.44 pm]